Chicago Board of Education; General Obligation

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1 Summary: Chicago Board of Education; General Obligation Primary Credit Analyst: Jennifer Boyd, Chicago (1) ; Secondary Contact: Helen Samuelson, Chicago (1) ; Table Of Contents Rationale Outlook Related Criteria And Research AUGUST 14,

2 Summary: Chicago Board of Education; General Obligation Credit Profile Chicago Brd of Ed GO Chicago Brd of Ed unltd tax GO bnds (dedicated rev) ser 2011A dtd 11/01/2011 due 12/01/ Chicago Brd of Ed unltd tax GO bnds (dedicated rev) ser 2011A dtd 11/01/2011 due 12/01/ Chicago Brd of Ed unltd tax GO bnds (dedicated rev) ser 2011C-1 dtd 12/20/2011 due 03/01/2032 Chicago Brd of Ed unltd tax GO bnds (dedicated rev) ser 2011C-2 dtd 12/20/2011 due 03/01/2032 Chicago Brd of Ed unltd tax GO bnds (dedicated rev) (Taxable Qual Sch Const Bnds) ser 2010C dtd 11/02/2010 due 11/01/2029 Chicago Brd of Ed unltd tax GO bnds (Dedicated Revenues) ser 2012A dtd 08/21/2012 due 12/01/2042 Chicago Brd of Ed unltd tax GO bnds (Dedicated Revenues) ser 2012A dtd 08/21/2012 due 12/01/2042 Chicago Brd of Ed unltd tax GO proj bnds (dedicated alternate rev) green bnds ser 2015E due 03/01/2033 Chicago Brd of Ed unltd tax GO proj bnds (dedicated alternate rev) ser 2015C due 03/01/2036 Chicago Brd of Ed unltd tax GO proj bnds (dedicated alternate rev) (Mandatory Put Bnds) ser 2015D due 03/01/2040 Chicago Brd of Ed unltd tax GO rfdg bnds (dedicated alternate rev) ser 2015A due 03/01/2032 Chicago Brd of Ed unltd tax GO rfdg bnds (dedicated alternate rev) ser 2015F due 03/01/ AUGUST 14,

3 Credit Profile (cont.) Chicago Brd of Ed unltd tax GO rfdg bnds (dedicated alternate rev) ser 2015G due 03/01/2032 Chicago Brd of Ed unltd tax GO rfdg bnds (dedicated revs) ser 2012B dtd 12/21/2012 due 12/01/ Chicago Brd of Ed unltd tax GO rfdg bnds (dedicated revs) ser 2012B dtd 12/21/2012 due 12/01/ Chicago Brd of Ed unltd tax GO rfdg bnds (dedicated rev) ser 2013A-1 dtd 05/22/2013 due 03/01/2026 Chicago Brd of Ed unltd tax GO rfdg bnds (dedicated rev) ser 2013A-2 dtd 05/22/2013 due 03/01/2035 Chicago Brd of Ed unltd tax GO rfdg bnds (dedicated rev) ser 2013A-3 dtd 05/22/2013 due 03/01/2036 Chicago Brd of Ed GO (wrap of insured) (AMBAC) & (AGM) Chicago Brd of Ed GO (wrap of insured) (FGIC) (National) (AGM) Chicago Brd of Ed GO (ASSURED GTY) Chicago Brd of Ed GO (ASSURED GTY) (SEC MKT) Chicago Brd of Ed GO (Dedicated Revenues) (BAM) Chicago Brd of Ed GO (Dedicated Tax Rev) (wrap of insured) (FGIC & BHAC) (SEC MKT) Chicago Brd of Ed GO (FGIC) (MBIA) (National) Chicago Brd of Ed GO (MBIA) (ASSURED GUARANTY) Chicago Brd of Ed GO (MBIA) (SEC MKT) (Nationlal) AUGUST 14,

4 Credit Profile (cont.) Chicago Brd of Ed GO Many issues are enhanced by bond insurance. Rationale Standard & Poor's Ratings Services lowered its long-term rating and underlying rating (SPUR) on Chicago Board of Education's general obligation (GO) bonds to 'BB' from 'BBB' and removed the ratings from, where they had been placed with negative implications on July 2, 2015 while we monitored the board's decisions in constructing its fiscal 2016 budget. The outlook is negative. The rating action reflects our view of the proposed fiscal 2016 budget, which includes what we view as the board's continued structural imbalance and low liquidity with a reliance on external borrowing for cash flow needs. We anticipate that the budget that the board ultimately approves will likely continue to exhibit the hallmarks of a 'BB' rating, including the board's major ongoing exposure to adverse business, financial, or economic conditions, which could lead to an inadequate capacity to meet obligations. The rating is based on our view of the board's: Proposed fiscal 2016 budget, which relies on $480 million in assistance from the state that has not been secured, $200 million in debt restructuring that pushes off debt service payments, $75 million in reserves, and $55 million in one-time support for debt service; Low liquidity, with cash flow projections showing negative cash for much of fiscal 2016 and the board managing its cash flow needs with two lines of credit totaling $935 million; Negotiations with the Chicago Teachers' Union for a new labor contract, which are ongoing and present additional challenges with the board pushing for employees to pay more of their share of the pension contributions; and Limited revenue-raising flexibility. The rating is also based on our view of the challenges the board faces in attempting to secure a sustainable long-term solution to its financial pressures, given the state's own financial problems reflected in the current budget stalemate, and the board's fiscal 2016 budget proposal that shows the continuation of a structural imbalance even if the board gets the assistance from the state. The board's $6.1 billion of GO bonds consists of alternate revenue bonds, secured by unrestricted general state aid, personal property replacement taxes, and other revenue. Our rating on the GO bonds reflects our view of the board's GO pledge and ability to levy unlimited ad valorem property taxes, and does not reflect the other securities. The board annually abates its debt service levy for all of its GO bonds backed by dedicated revenue in accordance with amounts on deposit. The board's proposed fiscal 2016 budget, which management anticipates that the board will address at its Aug. 26 meeting, includes $200 million in expenditure cuts announced earlier this summer, a reduction in capital projects, and AUGUST 14,

5 additional revenue from tax increment financing surplus funds and the increase in the property tax levy to the cap. However, the budget also attempts to maintain and improve services despite the financial pressure, with a plan to make additional cuts and borrow more money during the fiscal year if the board does not get the budgeted assistance from the state. The board's required pension contribution increases to $676 million in fiscal 2016 (12% of the operating budget, according to the proposed budget) and is scheduled to continue increasing. The board's required pension contribution was $634 million in fiscal 2015, and the board paid most of it with a line of credit at the end of the fiscal year. The board estimates ending fiscal 2015 with an $820.8 million shortfall, but the board's revenue recognition period was changed in fiscal 2015 to 60 days from 30, so the accrual year-end balance will benefit from a positive restatement of the fiscal 2014 fund balance. For fiscal 2014, the board reported a $513.1 million general fund drawdown that reduced its available general fund reserves to $354.7 million, or 6.5% of expenditures. The board had additional reserves in the form of the assigned fund balance for its debt service fund, but that amount declined to an estimated $57.1 million at fiscal year-end 2015, and the board has budgeted another decline in fiscal 2016 to $9.5 million. The cash flow projections in the proposed fiscal 2016 budget show negative cash for much of fiscal 2016 and the board managing its cash flow needs with two lines of credit totaling $935 million. Management anticipates finalizing those lines of credit in the near term. The board ended fiscal 2014 with $293 million in total government cash and investments (including cash held in school internal accounts but not cash in escrow). Another general fund budget gap in fiscal 2015, and the termination of multiple interest rate swaps following the lowering of debt ratings earlier this calendar year, further pressured the board's liquidity. In fiscal 2015 the board used a line of credit of $500 million, which it increased to $700 million at the end of the year largely to cover the pension payment. Given the proposed fiscal 2016 budget and continued cash flow challenges, we anticipate the board's liquidity will remain a significant credit weakness. Management reports a current cash level that is positive. We consider the board's financial management practices "good" under our financial management assessment (FMA) methodology. The FMA was revised to "good" from "strong" because of our view that the board's budget does not address expenditure pressures from its pension liability and debt service paid from general state aid in the revenue and expenditure assumptions, and because of our view of the board's decision to allow reserves to fall below the minimum level required by its reserve policy. Highlights of the board's financial management practices include monthly financial reports with budget-to-actual results, and quarterly reports to the investment committee on investment holdings. The board has a five-year financial plan and a five-year capital plan that includes funding sources. The board has an investment policy and debt management policy. It also has a reserve policy that requires the maintenance of an assigned fund balance of 5% to 10% of the operating and debt service budgets for the new fiscal year. However, the board has decided to continue to draw on reserves and not maintain the balance at the target level. In our view, the board's overall debt burden, inclusive of overlapping entities, is moderately high at 9% of estimated market value and high at $6,832 per capita. The debt service carrying charge was a moderate 8% of fiscal 2014 operating expenditures less capital outlays, and the board's proposed fiscal 2016 budget anticipates the carrying charge increasing to 11.1% of operating expenditures. The board plans to issue as much as $1.16 billion in new debt in the fall of 2015 for capital projects (including reimbursements), the debt restructuring to free up more general state aid AUGUST 14,

6 for operating purposes in fiscal 2016 and other purposes. The board's nonteaching staff are covered by the city's municipal pension system, to which the board makes no direct contributions. The board's teachers and teachers employed by charter schools operating in the city are covered by the Public School Teachers' Pension and Retirement Fund of Chicago, a defined benefit system. The state allowed the board to pay only $192 million of the $510 million annual required contribution (ARC), as calculated under the state's rules, to the teachers' pension fund in fiscal 2012 and $196 million of the nearly $600 million ARC in State statute mandates that the board pay its full required contribution starting in 2014, which was certified by the pension fund at $600 million for fiscal The unfunded actuarial accrued liability (UAAL) of the teachers' pension fund grew to $9.6 billion at the end of fiscal 2013, from $6.8 billion at the end of fiscal 2011, and the funded level fell to 49% on an actuarial basis from 60% in The proposed fiscal 2016 budget reports a funded level of 52% in The board is working with state legislators to increase state funding for Chicago Public Schools pensions, with the goal of reducing the board's unfunded liability and ARC for future fiscal years, and to provide more state support for the teachers' pension system. The pension fund subsidizes health care benefits for retired teachers and administrators. Under state statute, the pension system can subsidize retiree health care by as much as $65 million a year. The pension fund reported a UAAL for retiree health care of $2.35 billion as of June 30, The board operates Chicago Public Schools, which provides pre-kindergarten through 12th-grade education to students residing in Chicago. Enrollment decreased 3% from the school year to the school year, to 396,683. Chicago has a deep and diverse economic base stemming from its status as the hub of one of the country's largest metropolitan areas. The tax base's market value, as estimated by The Civic Federation, fell 25% from 2009 to 2012 to $206.9 billion, which, in our opinion, is a strong $76,270 per capita. We consider median household effective buying income (EBI) for the city adequate at 84% of the national level, and per capita EBI good at 94% of the national level. Outlook The negative outlook reflects our anticipation that low liquidity and a structural imbalance are likely to continue to challenge the board during the one-year outlook horizon, which could lead us to lower the rating during that timeframe. We also could lower the rating if the board faces any significant problems with market access or experiences unanticipated additional budgetary or liquidity pressures. We could revise the outlook to stable if the board achieves what we view as a credible and sustainable long-term solution to its financial pressures, and if the board demonstrates that it can manage its cash flow needs. Related Criteria And Research Related Criteria USPF Criteria: GO Debt, Oct. 12, 2006 USPF Criteria: Key General Obligation Ratio Credit Ranges Analysis Vs. Reality, April 2, AUGUST 14,

7 USPF Criteria: Financial Management Assessment, June 27, 2006 USPF Criteria: Debt Statement Analysis, Aug. 22, 2006 USPF Criteria: Methodology: Rating Approach To Obligations With Multiple Revenue Streams, Nov. 29, 2011 USPF Criteria: Assigning Issue Credit Ratings Of Operating Entities, May 20, 2015 Criteria: Use of And Outlooks, Sept. 14, 2009 Complete ratings information is available to subscribers of RatingsDirect at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. AUGUST 14,

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